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Four States and One U.S. Territory Could be Subject to a FUTA Credit Reduction in 2015 (Update)

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The end of the calendar year is approaching quickly and businesses need to be mindful of the various deadlines that can affect them, including the November 10 deadline for states that have outstanding Federal Unemployment Trust Fund loans that are being used to help states pay for unemployment benefits. These loans directly impact the amount employers are required to pay in Federal Unemployment Taxes (FUTA) and need to be closely monitored by employers.

If a state has an outstanding loan balance for two consecutive years on January 1 and fails to pay off the loan in full by November 10 of the second year, employers in that state will be subject to a FUTA credit reduction until the state has repaid the loan.[1]

Kentucky, New York, North Carolina and South Carolina have paid back their federal loans. These states will not face a credit reduction this year as long as their loan balance remains at zero on November 10.2   The states that have not paid back their loans as October 23 are California, Connecticut, Indiana and Ohio, as well as the U.S. territory, the Virgin Islands.3 It is anticipated, however, that Indiana will pay back its loan before November 10.4

These states could be subject to an increased credit reduction of their 5.4 percent unemployment credit. The general tax rate on this credit is 0.6 percent, but credit reduction states are subject to an increase of 0.3 percent in their tax rate for every year their loan goes unpaid.5 This means that employers in credit reduction states need to be prepared to pay higher FUTA taxes when filing Form 940 each year the state’s loan is not paid in full. Any increased FUTA liability due to credit reduction is considered incurred in Q4 and is due by January 31 of the following year.

If a state has not repaid its loan for a third consecutive year, it may be subject to an additional credit reduction called a 2.7 add-on.  After five consecutive years of having an outstanding loan, the state may be subject to another additional credit reduction called the Benefit Cost Rate (BCR) add-on.6 Both of these will further reduce states’ unemployment credit and should be closely monitored.

With these deadlines imposing pressure on certain states year over year, it can be especially difficult for employers operating in multiple credit reduction states to keep track of their FUTA tax liability. It’s important for employers to keep up with the status of the state’s Federal Unemployment Trust loan and understand how it may impact their annual tax filing.

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[1] http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/FUTA-Credit-Reduction

2,3 http://www.treasurydirect.gov/govt/reports/tfmp/tfmp_advactivitiessched.htm

4 http://www.indystar.com/story/news/politics/2015/10/22/gov-mike-pence-pay-off-federal-unemployment-loan/74357824/

5 http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/FUTA-Credit-Reduction

6http://static1.squarespace.com/static/544e8f09e4b0023e704dbd5f/t/55a7e6a5e4b05bf261fa782e/1437066917660/Vol+16176+Most+states+act+to+waive+BCR+add-on+to+2015+FUTA+credit+reduction+7-7-2015.pdf



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